A Christian Liberal is NOT an oxymoron.

Posted by XT on March 10th, 2008 in World News

I’ve noticed an uptick in people finding my site because they are looking for information on oil prices. Namely, everyone wants to know why oil is so expensive. The answer, simply put, is: George W. Bush.

Or, more to the point, it’s Bush’s fiscal policies. When the government spends more in a single year that it brings in as revenues, it has to create new money to cover the shortfall. It does that by auctioning off Treasury bonds - giving promisary notes on future money for investors to part with their current cash (of course, investors do this because the government promises more will be paid back to them than they are parting with today).

This is not automatically a bad thing. A growing economy needs new money to keep pace with demand. But, if the growth of new money outpaces the growth of the economy, then the value of the dollar declines. This is, as a matter of fact, what has been happening.

There are two ways to measure a surplus or deficit. One is in actual dollar values. The other is in percentage of GDP. Here’s a graph of the first measure:

In 2002, the budget goes into deficit and by 2004 it has reached a peak of $400 billion. Take a look at it in %GDP terms:


While it isn’t record-breaking percentage-wise, it sure is by absolute value.

Take a look now at the value of the dollar in comparison to the Euro over the last five years:

Of course, the value of the Euro fluctuates itself, so it isn’t a perfect measure of the value of a dollar. Take a look at this chart from the Financial Times:

Here’s something you need to know about the world oil market. The American dollar is the default currency for oil contracts. Even with no other action taking place, if the value of the US dollar falls, then the price of oil has to increase by that exact amount. Take a look at that last chart (or the last two). In 2002, the dollar reached about 112 on the chart - and now it has fallen to just over 70 (call it 72 so the math is easier). That’s a thirty-five percent decrease in the value of the dollar since that point.

In January of 2002, the price of a barrel of oil was $19.67. At the beginning of March of this year, it was $103. That is an increase of $83.33 - 35% of which was due entirely to the falling value of the dollar (about $29.17). Without the falling dollar, due largely (if not entirely) to governmental deficit spending, the price of oil would only be around $73.84 or so.

Now, obviously, there is an increase of $54.17 that is not due to the weak dollar. Where does that come from? Partly, it is from inflation not caused by energy prices (maybe as much as 5% or so).

In large part, it is simply fear. The international scene is much more volatile now than it was in 2002 - the war in Afghanistan has failed to pacify the Taliban and threatens to spread to nuclear-powered Pakistan. The war in Iraq continues to cause a disruption in oil shipped from that country and the tensions with Iran threaten to potentially shut down the Straits of Hormuz (note: there is no actual threat - only the threat of such a threat). There is continued unrest in Nigeria and in South America. There has been no actual supply disruption, but the potential for disruption is high in several places.

For most of my life, such things would still not have caused such a rise in prices. But the growing demand from the emerging mega-economies of China and India has tightened the supply chain - which just means there isn’t as much over-production as there used to be. So the Bush Administration is trying to get Saudi Arabia to use its influence in AOPEC (the Arabic portion of OPEC has its own organization) to spur higher production levels. So far, they have resisted. What we don’t know is if they are resisting because they are simply enjoying higher levels of profit or if they are resisting because they really don’t have the extra capacity to spare. In Saudi Arabia, oil production and reserve levels are state secrets, so we only know what they tell us - and it would be stupid of them to tell us the very thing we need to force them to cut oil prices.

What happened in the 1970s is that oil prices rose so fast that it killed the economies of oil-consuming nations. When they stopped buying oil, the price had to fall to spur demand again. I think we may be approaching that point now (See our economy stumbling? Energy prices are a big reason why.). But the prices need not fall unless both China and India also stumble. One of the effects of globalization is that the US economic health, while still being the “big boy on the block”, is not as necessary to the economic health of oil-producing countries as it used to be. We can still drag down the world economy, it’s just going to have to get much worse before it does.

Yeah. Aren’t you glad you read all the way down to hear that? Sleep well.

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